By ZHOU LANXU | China Daily | Updated: 2020-12-11

Multi-layered system to help reform and streamline the policy regime

The COVID-19 pandemic has forced China's financial system to tackle immediate challenges including the very survival of some businesses. But top regulators have not ignored a longer term issue that is as pressing as the former, if not more so－namely, the sustainability of the pension system.

As stepping up efforts to reform its gigantic pension system has become a must-do for China with its aging population, foreign financial institutions are eagerly getting themselves ready to take a seat at the table.

Foreign retirement product managers, due to their rich global experience and China's continuous opening-up agenda, are well-positioned to thrive in the country's personal pension market, which is on the verge of explosive growth, experts said.

The Communist Party of China's central leadership has proposed developing a multilayered, multi-pillar pension insurance system in the upcoming 14th Five-Year Plan period (2021-25), according to a document released after the Fifth Plenary Session of the 19th Central Committee of the CPC.

It is a "very urgent" task for China to develop a third-pillar pension system, formed by personal retirement products and complementing the current State-run first pillar and the employment-based second pillar, said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission.

Guo urged faster development of the third-pillar pension system on at least three different public occasions this year, pledging to unify standards of retirement-related financial products, roll out of more pilot projects and encouraging the share of retirement funds in the capital market to catch up with the global average.

"Compared with many countries, the third pillar has seen relatively slow growth in China, taking up a low proportion within the whole pension system and providing far from adequate support for retirement funding," Guo said at the Annual Conference of Financial Street Forum 2020 in Beijing in October.

During the 13th Five-Year Plan period (2016-20), the country stepped up efforts to establish the regulatory framework for the third-pillar pension system. In 2018, China rolled out its tax-deferred personal pension insurance pilot program, which offers tax incentives.

About 47,000 clients had already purchased personal tax-deferred pension insurance products worth a total premium of 1.24 billion yuan ($188.7 million) by the end of last year, said the Annual Report on the Development of China's Aging Finance (2020).

Meanwhile, 1.07 million individual accounts were subscribed to involving 22.83 billion yuan worth of pension target investment funds as of the end of April, the report said.

However, the scale is still limited compared with the first-pillar system, which involves nearly 1 billion people.

First-pillar pensions amounted to 8.05 trillion yuan in 2018, accounting for 79 percent of the country's total pension system. The remaining 21 percent was taken up by the second-pillar employment-based pensions, according to a report co-released by KPMG and China Health and Elderly Care Group Co Ltd in July.

This first pillar-dominated structure must be reformed in the coming decades, experts said, as government-run pensions rely on contributions from the working-age population to fund the retired, while the size of the former is destined to shrink in relation to the latter amid rapid demographic changes.

The KPMG report estimated that by 2030, the value of personal retirement products will amount to 46 trillion yuan and represent 40.7 percent of the total pension system, indicating a compound annual growth rate of as much as 33 percent from 2018 to 2030.

This solid growth potential is attracting global insurers and asset managers.

At least nine out of the 23 insurers who are licensed to sell tax-deferred personal pension insurance products are joint ventures. Last year, China approved the establishment of the country's first joint-venture pension insurance company, owned by Heng An Standard Life.

"Foreign institutions are upbeat about China's retirement income market and are eager to enter the market," said Zhou Xing, PwC insurance industry leader for the Chinese mainland.

Rich experience in retirement product management overseas is likely to help foreign insurers take a considerable share of China's private retirement income market over the long term, Zhou said on the sidelines of a forum co-hosted by Zhongbao Insurance Asset Registration and Exchange Co Ltd and Peking University's Guanghua School of Management.

"Differing from other insurance products, retirement product management relies less on the network of offline branches and more on deep expertise in long-term investment and risk management, which is exactly the advantage enjoyed by foreign insurers," Zhou said.

Asset management giants, meanwhile, are vying with each other in the retirement investment fund market. Mutual fund joint ventures invested by foreign institutions like Credit Suisse, Schroders and Invesco have issued retirement target funds, while others like BlackRock and Fidelity International are seeking to participate as wholly-owned businesses.

BlackRock, which manages over $7 trillion of assets on behalf of clients with more than two-thirds directly retirement related, is excited about helping address the retirement challenge facing China, Geraldine Buckingham, Black-Rock's chair for the Asia-Pacific region, said at a recent forum.

The company has been approved to set up China's first wholly foreign-owned mutual fund manager in August, after the country lifted foreign ownership caps in the sector in April.

Fidelity is actively expanding its team of research and investment staff in China to prepare to issue retirement-related publicly offered products once getting licensed, said Daisy Ho, Fidelity International's head of China operations.

It applied to set up a wholly owned mutual fund unit in China in May and is awaiting authorization. In designing its publicly offered products, Fidelity will fully leverage its overseas management expertise as well as its experience of serving as the research consultant of China Asset Management Co Ltd, a domestic fund manager, Ho said.

Tao Jin, a senior researcher at Suning Institute of Finance, said policy support will be another key factor helping boost development of foreign institutions in China's personal pension market.

The Chinese government is expected to further encourage the participation of foreign competitors as it will help enrich products and offer domestic counterparts more opportunities to learn advanced pension management expertise, Tao said.

In July last year, China announced it would allow foreign firms to establish or hold stakes in pension fund management companies. Though the first foreign company of this kind has not yet emerged, the nation has approved the establishment of the first pension insurance joint venture and the first wholly foreign-owned life insurer, reassuring the world of its continuous efforts to open the sector.

Tao added that despite foreign insurers' advantages in investment expertise, they still need to address weak links such as the lack of innovative product designs and strengthen their network of branches and agencies to thrive in the Chinese pension market.

Experts also said multiple policy incentives are needed to more quickly unleash the great potential of the personal pension market, especially as progress made by the tax-deferred pension insurance pilot program has fallen short of expectations.

Zhou with PwC said efforts to expand the pilot program into more areas are of great importance. The program is now in place only in Shanghai, Fujian province and Suzhou Industrial Park, Jiangsu province. "Once the scope is expanded, we expect booming development of the sector," Zhou said, adding that it is also important to grant greater tax benefits under the program and strengthen investor education to raise awareness and literacy of retirement investment.

The insurance industry should adjust the pricing of retirement products to strike a balance between offering a favorable bid to investors and giving insurers adequate incentives to sell the products, Zhou added.